After Adama’s Abortive IPO, IDB Is Stuck Between a Rock and a Hard Place

The conglomerate’s controlling shareholders were counting on the agrochemicals company to relieve the group of part of its heavy debt load. Now their options have narrowed and the group’s stock market valuation has collapsed

Daniel Bar On

It’s been a bumpy ride for Eduardo Elsztain and Moti Ben-Moshe — that unlikely pair of foreign investors, one the heir to an Argentinian real estate empire and the other a hardscrabble Israeli who made his fortune in Germany — who took over the financially ailing IDB group a little less than a year ago. They have spent 1.4 billion shekels ($365 million) to date on IDB, but have failed to bring its unwieldy financial house into order while they squabble over strategy and control.

The last few days have been the most uncomfortable of all for Elsztain and Ben-Moshe: Adama, the giant agrochemical firm formerly known as Makhteshim Agan, pulled its long waited initial public offering. IDB, which owns 40% of the company, had been counting on a successful IPO to help pay down a large part of the group’s debt.

The first signs of trouble with the IPO came two weeks ago, when it was learned that Adama would be valued for the offering at $2.35 billion before the money, hundreds of millions of dollars less than analysts had anticipated. The price of both the stocks and bonds of Discount Investment Corporation and IDB Development Corporation, the two companies at the top of the IDB pyramid, plunged on the news. On Sunday, Discount shares tumbled another 25%, so that over the past three months the share has lost over half its value, which adds up to a paper loss for shareholders of 740 million shekels. A company whose holdings include some of Israel’s biggest and best-known businesses like the food retailer Super-Sol, mobile carrier Cellcom Israel and the real estate firm Property & Building Limited, Discount now has a stock market valuation of a mere 810 million shekels.

IDB Development shares have fallen to their lowest since the company was relisted for trading on the Tel Aviv Stock Exchange in May. The company now has a market cap of just 633 million shekels. The share fell 17% on Sunday, bringing its total drop over the past three months to a stunning 60%. Shareholders have lost some 460 million shekels of its value. The price of IDB Development’s bonds have also tumbled in the past few days and now have yields of 10.8% to 15%, rates that are far too high for the company to contemplate rolling over its debt. And the bonds are only expected to fall further.

Marquee assets aside, that munchkin-size market valuation for Discount makes sense when you look at its book. After distributing a 200 million-shekel dividend recently, Discount has just 1.86 billion shekels of cash remaining. Against that, it has a gross debt to bondholders and banks totaling some 5.46 billion shekels.

After adding up the value of all of Discount’s holdings and subtracting the net financial debt, Discount’s net asset value is 1.06 billion shekels — almost exactly the same as its market value.

The problem is that the net asset value includes the value of its 40% Adama stake, which was valued on Discount’s books at 657 million shekels at the end of June. When IDB sold the other 60% of Makhteshim-Agan four years ago, to China National Chemical Corporation, a state-owned chemicals company known as ChemChina, ChemChina loaned IDB $960 million, a debt that today has grown to about $1.1 billion. As collateral, IDB put up the Adama stake.

Discount has another four years before it has to decide whether it wants to repay the loan, roll it over or surrender the Adama shares to ChemChina.

The problem for Discount is that it supposed to start paying a steep annual interest rate of over 6% on the loan starting in the second half of 2015, which will saddle it with an additional 230 million shekels a year in financing expenses. Bondholders, who are waiting to be paid the 4.8 billion shekels IDB owes them, may well object to Discount rolling over the loan.

Does the book value of the Adama option reflect its true value?

It would have, had Adama had completed its IPO at the upper end of the proposed price range — though even then the share would have had to rise after the offering. But that scenario never played out, so Discount’s own share price could end up taking another beating in the stock market. Without the Adama valuation, Discount is worth only 400 million shekels to 500 million shekels. In any case, it will not be clear how the abortive Adama IPO will affect its value in Discount’s books until it releases its third-quarter financial reports, by the end of November.

Not everything may turn out so badly for Discount: Adama may yet successfully pull off an IPO at a better valuation and create value for Discount Investments.

But Discount’s and IDB’s problem go beyond Adama. It is quite likely that the rest of Discount’s holdings will show little increase in value or pay significant dividends over the next few years. The only promising holding is Elron, a medical technology firm, that has a number of investments that could be sold at a tidy profit in the next few years.

What about the bondholders?

If Discount can’t cash in its Adama shares and begins paying interest to Chinese banks next year, it will be liable for some 2.1 billion shekels in repayments by the end of 2016. With the 1.86 billion shekels on its books now, that does not seem that will be a major problem. It can close the difference by collecting dividends from its subsidiaries or by selling off holdings. But its bondholders will not make life easy for Discount, as evidenced by their attempts to prevent the recent 200-million-shekel dividend.

Even if Discount meets the minimum financial ratios required under the Companies Law before it can distribute dividends, that does not mean it will be able to so. IDB Development also needs cash to pay off the 4 billion shekels it owes bondholders and banks. Without dividends from Discount, it won’t be able to meet its obligations.

If you discount the 1.1 billion shekels that Elsztain and Ben-Moshe injected into the company, as well as a few tens of millions put in by minority shareholders, IDB Development’s NAV is a negative 400 million shekels to 500 million shekels.

Elsztain and Ben-Moshe have said in the past six months that they think the value of IDB’s assets far exceeds their market value and that their holding is a strategic, long-term investment. But with the share prices of IDB Development and Discount wandering the basement, they are now looking at a paper loss of over 1 billion shekels. It seems the two overpaid for IDB, which was in deep trouble when they bought it from Nochi Dankner.

The two certainly deserve credit for the huge sums they have invested in the IDB group as part of the debt restructuring and recapitalization plan. But they did not manage to leverage the praise they earned at the beginning of the process or the rally of Israel’s stock market over the past several months. They never succeeded in convincing the markets they could add to the value of IDB’s main assets. Nor did they take advantage of the low yields Discount and IDB bonds were trading to refinance part of the group’s debts. That would have given them a few years of quiet to carry out their long-term strategy. They also never reached understandings with the banks on easing the covenants on over 900 million shekels in loans for IDB Development. They also misread the map when they decided not to find a new buyer for Clal Insurance when an offer from a Chinese group fell through.

They also did not recruit new management for the group, which is still managed by Dankner associates. On the other hand, it is unlikely now that the best executive talent will want to work for a group with such dominant owners.

Much of the blame may be due to the bad relations between Elsztain and Ben-Moshe, who have been unable to work together and act quickly. One of them may have to exercise the “buy me, buy you” option that they have sometime next year. It may not happen because both feel they have already staked too much in IBD, on top of their commitment to putting even more cash as part of the bail-out agreement they are committed to.

Elsztain and Ben-Moshe declined to comment for this report.